May 1 (Bloomberg) -- Citigroup Inc., Bank of America Corp.
and their biggest rivals could be forced to shrink or divest
businesses under proposals emerging as the U.S. Senate weighs a
sweeping overhaul of financial-industry regulations.

Senators are preparing amendments that would limit the
share of deposits and assets banks could control or force them
to separate investment-banking functions from commercial
lending. The aim is to keep financial companies from getting so
big their collapse could threaten the economy.

“If you’re too big to fail, from my standpoint, you’re too
big,” said Senator Byron Dorgan, a North Dakota Democrat who
plans to offer the divestiture amendment next week.

The Senate has begun debate on Banking Committee Chairman
Christopher Dodd’s proposed rules overhaul, designed to prevent
a repeat of the 2008 financial crisis that forced the U.S. to
extend $700 billion in taxpayer funds to companies including
Citigroup and Bank of America. Lawmakers are drafting rules amid
voter anger over Wall Street risk-taking blamed for causing the
worst economic collapse since the Great Depression.

Democratic Senators Sherrod Brown of Ohio and Ted Kaufman
of Delaware are offering an amendment to cap banks’ non-deposit
liabilities at 2 percent of gross domestic product, or about
$280 billion. About nine of the largest U.S. bank-holding
companies, including Citigroup, Bank of America and JPMorgan
Chase & Co., would have to shrink by 40 percent, according to a
summary of the proposal released by Kaufman’s office.

The amendment also would impose a 10 percent cap on a bank
holding company’s share of U.S. insured deposits.

Dodd Disagrees

Dodd, a Connecticut Democrat, told reporters yesterday he
didn’t agree with the focus on size.

“It’s the issue of excessive risk,” Dodd said. “It has
to do with capital standards, liquidity, leverage -- those are
the things that really pose the threats.”

Staff for Dodd and Alabama Senator Richard Shelby, the top
Republican on the Senate Banking Committee, will work this
weekend to craft an amendment to combine their ideas to prevent
future bailouts, a section of the bill Republicans argued
contained loopholes that would perpetuate the practice.

Dodd told reporters he wanted to “put that whole issue
aside” to allow the Senate to debate proposed changes on a
consumer agency, derivatives and other parts of the legislation.

His bill would allow regulators to seize and liquidate
failing firms whose collapse would threaten the economy, a power
Democrats say could have kept the U.S. from having to prop up
financial companies after credit markets froze in 2008.

Not Riskier

Financial industry groups and some Republicans said that
large companies aren’t necessarily riskier.

“The reason that our large financial institutions are the
size that they are is because we have companies in this country
that need large institutions in order to be competitive,” said
Senator Bob Corker, a Tennessee Republican who helped draft the
liquidation section of Dodd’s bill.

“I know people can score political points and it’s great
to take on Wall Street, but what we’ve got to be careful of in
this debate is that we’re not cutting our nose off to spite our
face,” he said yesterday.

Senator Maria Cantwell, a Washington Democrat, is working
with Senator John McCain, an Arizona Republican, and others to
craft an amendment to split commercial and investment banking,
Cantwell’s spokesman John Diamond said. The amendment is based
on a proposal Cantwell and McCain offered in December to
reinstate the Depression-era Glass-Steagall Act.

Work With Industry

Financial Services Forum President Rob Nichols, who opposes
limits on bank size, said the government should work with the
financial industry to improve risk management, internal control,
corporate governance and capitalization.

“To be a global financial leader, the United States needs
small, medium and large financial institutions, with various
business models and areas of expertise,” said Nichols, whose
Washington-based trade group represents the chief executive
officers of the largest financial firms.

Dorgan said he will propose requiring companies deemed too
big to fail to divest certain businesses until they no longer
pose a risk. He also plans to offer an amendment that would
eliminate so-called naked credit-default swaps, which let
investors bet on default of bonds they don’t hold.